THE HARMONIZATION OF TAX LEGISLATION: ASYMMETRY VERSUS UNIFORMITY PART I

The harmonization of federal legislation is a federal government priority. "Harmonization" in this context does not mean the uniformization of tax consequences across the country or the harmonization of Quebec's Taxation Act[2] with its federal cousin, the Income Tax Act,[3] but rather the harmonious application of federal statutes with Canada's two legal systems (i.e., the civil law in Quebec and the common law in the rest of the country) and in both official languages.

The Honourable Stéphane Dion, President of the Queen's Privy Council for Canada and Minister of Intergovernmental Affairs, summed up the objectives and the scope of the Department of Justice of Canada's harmonization work in an address he gave in Montreal on November 24, 1997, at the Symposium on the Harmonization of Federal Legislation with Quebec Civil Law:

The scope of this project, which seeks to bring Quebec civil law and existing federal legislation more into step, is without precedent in Canada's legal history. This initiative, which has now been underway for more than four years, is based on close cooperation between the departments of Justice of Canada and Quebec and has benefited from the vital contribution of the academic community.

The objective is ambitious. It is not only to bring about terminological changes, but in particular genuinely to take into account the bilingual and bijural nature of . While the harmonization project is designed first and foremost to allow Quebecers to recognize themselves better in federal legislation, it will also be an opportunity to ensure that there is not too much discrepancy between the common law in various provinces and the concepts imparted in federal legislation. All Canadians will benefit, because the end result will be clarification of the federal status and a legal corpus that is more respectful of their own institutions.

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As Professor Morel of the Faculty of Law of the Université de Montréal has noted. [Translation] "The complementarity of federal law and civil law, however natural it may be [...] must be constantly maintained and reaffirmed, if not reinvented, to remain alive." More than ever, then, we must do all we can to develop this important aspect of Canadian diversity. Prime Minister Jean Chrétien believes deeply in the advantages of that diversity, which is why he moved the resolution adopted in 1995 by both Houses of Parliament recognizing that Quebec society is distinguished in particular by its civil law tradition and calling on "all components of the legislative and executive branches of government to take note of this recognition and be guided in their conduct accordingly."

Turning words into action, his government developed the means to capitalize on this richness. First, the Department of Justice adopted in June 1995 a policy on legislative bijuralism, which reflects its desire to make laws clearer and for an interpretation that is more accessible to all Canadians. The Department of Justice also made a commitment at that time to draft both versions of all bills or regulations relating to private law, also taking account of the terminology, concepts, notions and institutions specific to Canada's two private law systems. [4]

This column addresses the thorny issue of asymmetry versus uniformization in the application of tax provisions across the country. As noted above, the purpose of the harmonization of tax statutes is not to make uniform the application of federal statutes across the country but it is instead to ensure the respect of both systems of private law, namely, civil law and common law, in the application of federal statutes.

However, the harmonization of tax legislation cannot ignore the principle of horizontal equity. The Department of Justice strives to find harmonization solutions that make it possible to respect this principle of equity while respecting the integrity of each of Canada's private law systems. There are situations where, unfortunately, such solutions are not possible. It then behoves the duty of the Department of Finance to decide whether, in a particular situation, asymmetry is acceptable.

The complementarity of provincial private law with federal legislation is at the source of the work on harmonization. The recent enactment of sections 8.1 et 8.2 of the Interpretation Act[5] does not appear to leave any doubt as to the courts' duty to apply private provincial law where federal legislation refers, for its application, to a private law concept and Parliament has not expressly or implicitly dissociated itself from the provincial private law, despite the asymmetrical tax treatment that may result across the country.

The first part of this column will deal with the federal government's main achievements in the area of harmonization. It will address sections 8.1 and 8.2 of the Interpretation Act and it will end with a discussion of fiscal asymmetry as opposed to fiscal uniformity.

In part 2 of this column, which is scheduled to appear in an upcoming issue of this publication, we will present the leading court decisions dealing with the application of provincial private law in the context of the application of tax legislation. In so doing, the question will be addressed as to whether some of these cases would have been decided differently if sections 8.1 and 8.2 of the Interpretation Act had been enacted at the time.

HARMONIZATION: WHERE ARE WE?

A number of my Department of Justice colleagues have discussed in earlier columns[6] some of the work or results already achieved or about to be achieved in harmonizing federal legislation, not only by the departments of Justice and Finance of Canada but also by eminent academics and practitioners. Examples include the following:

A First Act to harmonize federal law with the civil law of the Province of Quebec and to amend certain Acts in order to ensure that each language version takes into account the common law and the civil law, S.C. 2001, c. 4;

An Act to amend the Income Tax Act,the Income Tax Application Rules, certain Acts related to the Income Tax Act, the Canada Pension Plan, the Customs Act, the Excise Tax Act, the Modernization of Benefits and Obligations Act and another Act related to the Excise Tax Act, S.C. 2001, c. 17;

An Act to amend the Customs Act and to make related amendments to other Acts, S.C. 2001, c. 25;

Bill C-47, An Act respecting the taxation of spirits, wine and tobacco and the treatment of ships' stores;

Publication of the first collection of studies on harmonization entitled The Harmonization of Federal Legislation with Quebec Civil Law and Canadian Bijuralism, Department of Justice, 1999;

Symposium on the Harmonization of Federal Tax Legislation - Bijuralism, held in Montreal on October 3, 2001, in the course of the annual conference of the Association de Planification fiscale et financière (APFF);

Publication of the second collection of studies on harmonization entitled The Harmonization of Federal Legislation with the Civil Law of the Province of Quebec and Canadian Bijuralism, Department of Justice, 2001;

Upcoming publication of a thematic collection of studies by the APFF in collaboration with the Department of Justice of Canada containing eight texts on the harmonization of federal tax legislation. Each text will be published in both English and in French.

As is apparent, a great deal of progress has been achieved so far in the harmonization of tax legislation. However, a great deal remains to be done and the departments of Justice and Finance, with the close collaboration of the tax and academic communities, are continuing their harmonization work with determination.

The approach taken to the harmonization of tax legislation consists in reviewing new legislation introduced since the 2000 budget and progressively making consequential amendments to existing statutes.

As noted earlier, certain specific harmonization amendments have already been made to federal tax statutes and others are in the process of enactment. The harmonization of current federal tax statutes will continue in the coming years and new amendments to the tax statutes will be systematically harmonized.

The complete harmonization of federal tax statutes is a process that requires much attention to detail, research and time. The financial impact for the government of Canada is also more significant in the case of tax statutes than in any other type of legislation. Thus, the Department of Finance must proceed carefully with this work. That is the reason, inter alia, why there may not yet appear that harmonization has had a discernible effect on federal tax legislation.

But, make no mistake!!!

The recent enactment of sections 8.1 and 8.2 of the Interpretation Act has had an immediate effect on the harmonization and interpretation of federal tax legislation and their effects may be invaluable. Think, for example, of the conclusions of the Federal Court of Appeal's decision in Construction Bérou Inc.[8] Would the result have been different if section 8.1 of the Interpretation Act had been in force at the time of the judgment? This decision will be the subject of further comments in the next part of this column.

Sections 8.1 and 8.2 of the Interpretation Act provide as follows:

8.1 Both the common law and the civil law are equally authoritative and recognized sources of the law of property and civil rights in Canada and, unless otherwise provided by law, if in interpreting an enactment it is necessary to refer to a province's rules, principles or concepts forming part of the law of property and civil rights, reference must be made to the rules, principles and concepts in force in the province at the time the enactment is being applied.(emphasis added)

8.2 Unless otherwise provided by law, when an enactment contains both civil law and common law terminology, or terminology that has a different meaning in the civil law and the common law, the civil law terminology or meaning is to be adopted in the Province of Quebec and the common law terminology or meaning is to be adopted in the other provinces.

The enactment of section 8.1 of the Interpretation Act confirms the majority view of the courts, i.e., the principle of the complementarity of federal law and provincial law in matters of property and civil rights.[9] Complementarity is taken to mean the use of provincial private law rules for the application of a federal statute that refers to private law concepts without defining its scope. It should be noted, however, that Parliament can decide to enact its own private law rules or it can decide that the rules of one particular system of private law will apply for the purposes of the application of a federal enactment. Parliament can then decide to dissociate itself from the provincial private law rules. This, incidentally, is the meaning of the phrase "unless otherwise provided by law" in section 8.1 of the Interpretation Act.

Chief Judge Garon of the Tax Court of Canada made the following comments regarding the two new provisions of the Interpretation Act on the occasion of the Colloque sur l'harmonisation de la législation fiscale fédérale - Bijuridisme, held on October 3, 2001, at the annual conference of the APFF:

[TRANSLATION] The Federal Law-Civil Law Harmonization Act, No. 1 received Royal Assent on May 10, 2001. One of the most significant changes made by this Act was the addition to the Interpretation Act of two sections, which read as follows:

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In my view, this amendment to the Interpretation Act, which reflects the majority trend among the courts in tax cases, clarifies the rules of interpretation and will make the civil law's role in federal tax matters clearer in future.

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In conclusion, then, I would like to reiterate that practitioners and judges face a number of challenges in construing taxing statutes, including that of harmonizing federal statutes with provincial law, where necessary. I believe that the civil law must fully assume its rightful place in the application of federal tax legislation to Quebec taxpayers, since this approach reflects our constitutional reality. The amendments to the Interpretation Act and other statutes attest to the Parliament of Canada's increased respect for the different legal traditions in Canada. It is my view that they will encourage the courts to assign a greater role to the principle of complementarity in the interpretation of federal and provincial statutes.[10]

ASYMETRY VERSUS UNIFORM TREATMENT

No one seems to question the benefits of harmonizing federal legislation with the private law of the provinces. There even seems to be a consensus in the legal community that harmonization is far more than a commendable objective; it is also a duty of the government of Canada to respect the private law of the provinces unless it has enacted legislation in this field itself.

However, commendable it may be, in some situations, this objective may have impacts on the principle of horizontal tax equity (identical tax treatment regardless of the applicable legal system or province of application). The complementarity of provincial private law with federal tax legislation will necessarily lead to situations of tax asymmetry depending on whether a taxpayer is a resident of or carries on business in a province rather than another.

Before the enactment of sections 8.1 and 8.2 of the Interpretation Act, some judges disregarded the principle of the complementarity of provincial law in the application of federal tax legislation in order to preserve a certain tax equity (uniformity).The following comments of Chief Judge Garon provide a good summary of the challenge faced by courts in interpreting tax legislation in a bijural country:

[TRANSLATION] Lawyers and judges face a number of challenges in interpreting federal taxing statutes. Those statutes must be construed in such a way as to respect Canada's four legal "constituencies", namely, common law (English and French) and civil law (English and French). However, federal tax legislation does not always define the terminology it uses, and that terminology, in many cases, derives its meaning from the private law of either the common law or the civil law systems. In some instances, the statutes also employ terminology which has meaning in only one of the two legal systems, that is, common law or civil law. To correct these deficiencies, judges must sometimes choose between two great legal principles: either that requiring that an Act be so interpreted that it applies uniformly across the country, or that requiring compliance with the constitutional principle that properly law and civil rights are governed by provincial legislation.

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The difficulty in achieving a "pure" application of complementarity in Canada, however, stems from the fact that the taxing statutes often refer to concepts that exist in only one of Canada's two systems of private law and which more often are found only in common law. Concepts such as "mortgage", "beneficial ownership" and certain notions of trust are concepts specific to the common law and have no civil law "equivalent".

In this type of situation, as noted above, a judge often has to choose between two great legal principles: either that according to which a statute must be interpreted in a uniform manner across the country or that according to which any question of private law must de determined in accordance with the legislation of the province where the taxpayer resides or is domiciled. In the majority of cases, the courts have decided to adopt the principles of complementarity. As Décary J. of the Federal Court - Trial Division wrote in Lagueux & Frères: "Application of the Income Tax Act is subject to a civil determination, whether such a determination be according to civil or common law."

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While reliance on the principle of complementarity is consistent with the rules of interpretation, the result is not always satisfactory since it may lead to non-standard application of taxing statutes. This problem has often been raised by the courts, which have suggested that Parliament, which has legislative authority, should correct the deficiencies in the legislation.

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In certain circumstances, however, the courts have preferred a uniform application of the legislation and thus dissociation to complementarity. Some concepts contained in the Income Tax Act, for example, are commonly interpreted uniformly throughout the country, even though they are not defined in that Act or it does not assign them a specific meaning.[11]

According to Chief Judge Garon, there are thus situations where the uniformity of tax treatment is to be preferred and such uniformity is to be maintained despite the enactment of sections 8.1 and 8.2 of the Interpretation Act. One example offered by Judge Garon is the application of a provision in the ITA that refers to a specific concept from one legal system (e.g. common law) that does not exist in the legal system (e.g., civil law) of the province where this provision is sought to be applied. This is what is called "unijuralism" in the harmonizers' jargon. Such unijuralism in a legislative provision may occur either because there is no equivalent in the other legal system or because, in drafting the provision, one of the two legal systems was not taken into account.

It is just such unijural situations that the harmonization project was intended, inter alia, to analyze. The meticulous examination of the entire federal tax legislation will make it possible to identify those provisions that involve a problem of unijuralism and to find, if necessary, a solution so that they can be applied in all of the provinces.

It must be remembered that the courts will not have to apply the principle of complementarity where the legislative provision in question does not refer to a private law concept but rather to a public law concept (e.g., registered charity) or where Parliament has explicitly or implicitly dissociated itself from the provincial private law.

The purpose of the harmonization process is not to make the effects of federal legislation uniform across Canada but to ensure that its application respects each of Canada's legal systems. Consequently, it is entirely consistent that, despite the harmonization efforts (which in some cases will enable the tax effects of a provision to be uniform regardless of which legal system applies), there will continue to be situations where a tax provision will have different effects depending on the province of application. Is this unsatisfactory per se? As Justice Robert Décary indicated in Attorney General of Canada and Treasury Board of Canada v. St-Hiliaire:

It is the Constitution of Canada itself which provides that some federal laws have differing effects according to whether they are applied in Quebec or in the other provinces. By guaranteeing the perpetuity of the civil law in Quebec and encouraging in section 94 the uniformization of the laws of provinces other than Quebec relative to property and civil rights, the Constitution Act, 1867 enshrines in Canada the federal principle that a federal law that resorts to an external source of private law will not necessarily apply uniformly throughout the country. To associate systematically all federal legislation with common law is to ignore the Constitution.[12]

The Honourable Justice Michel Bastarache of the Supreme Court of Canada even expressed the following comments at a luncheon on bijuralism and the judiciary, held in Ottawa on February 4, 2000:

While civil law and common law complement the private law provisions of federal legislation, at the same time, federal legislation should not be applied uniformly throughout the country in every respect. Our objective is legal duality, not necessarily to achieve one rule to be applied uniformly across Canada; this requires respect for the character and uniqueness of the concepts and principles of each legal system. The fact that provincial legislatures may pursue distinctive legal policies which might each be different as well as different from those of Parliament is a principal justification for federalism. Indeed, as professed by Jean-Marie Brisson and André Morel:

While it is true that these laws "apply to the whole of Canada", as subsection 8(1) of the Interpretation Act states, it is nowhere stated that they must apply uniformly in all places and in all respects. Does not the division of powers between the federal and provincial governments indicate the contrary? As one writer has pointed out, in addressing this supposed uniformity: "If all aspects of the law should be exactly the same across the country, why have a federal system?"

This statement merits re-emphasis- If uniformity was our goal, what would be the purpose of our federal system and bijural culture? The need to recognize diversity should not, however, inhibit the need for coherence and the need to reduce conceptual and linguistic incongruence,[13]

Complementarity is the rule, then, despite the asymmetry that can result from it. In such a situation, it will be up to the Department of Finance to determine whether the asymmetry in a given tax situation is acceptable and, if not, to make the appropriate corrections.

CONCLUSION

We have endeavoured in this column to show that the process of harmonizing tax legislation is well underway and that its effects should already be noticeable in terms of their interpretation.

Sections 8.1 and 8.2 of the Interpretation Act codify the leading case law according to which provincial private law must be resorted to (complementarity) where a federal enactment refers to private law concepts and is silent as to the meaning that is to be given to these private law concepts.

Therefore, it is recognized that tax asymmetry is a possible tax consequence and that where this is the case the judges should in principle recognize it. It will be up to Parliament to make the necessary corrections, if needed.

Footnotes

[1] This column was originally published in the Revue de planification fiscale et successorale, (2002), Vol. 23, nº 2, of the Association de planification fiscale et financière. The writer wishes to thank all members of the tax law team in the Bijuralism and Drafting Support Services Group, Legislative Services Branch, Department of Justice of Canada, for their valuable comments and collaboration in the revision of this paper.

[4] Reproduced in The Harmonization of Federal Legislation with the Civil Law
of the Province of Quebec and Canadian Bijuralism, Second publication, Booklet 1, Department of Justice of Canada, 2001, pp. 1-4.

[7] These sections were introduced into the Interpretation Act by the
First Act to harmonize federal law with the civil law of the Province of Quebec and to amend certain Acts in order to ensure that that each language version takes into account the common law and the civil law, S.C. 2001, c. 4, s. 8.

[9] For an exhaustive study of the concepts of complementarity and dissociation,
the reader is referred to the following article: Jean-Maurice BRISSON and André MOREL, "Federal Law and Civil Law Complementarity, Dissociation", in The Harmonization of Federal Legislation with Quebec
Civil Law and Canadian Bijuralism, Collection of Studies, Department of Justice of Canada, 1999.

[10] The full text of Judge Garon's address will be published in the APFF thematic
review, cited at the beginning of this paper.

[13] Reproduced in The Harmonization of Federal Legislation with the Civil Law of
the Province of Quebec and Canadian Bijuralism, Second Publication, Booklet 1, Department of Justice of Canada, 2001, pp. 19-26.